Observations by an academic researcher on the use of “open”-ness as a competitive strategy, with a particular interest in coping with the commoditization of information goods and technologies in an Internet-enabled world.

While Americans (unlike say Japanese) have been used to “all you can eat” wireline service for generations, it is instructive as to how long it has taken for the commoditization of voice to finally impact the major players.

Voice: From Premium to Commodity

When I started researching the cellphone industry in 1996, there were no national carriers and two operators in each city. The CDMA carriers were still fragmented into regional carriers: AirTouch (an independent company), GTE Mobilnet, Bell Atlantic Nynex Mobile — and what became Cingular was equally fragmented between AT&T (the former McCaw Cellular), Bell South and Southwestern Bell. Sprint was just starting its efforts to build a national network, and VoiceStream was 4 years away from becoming the US subsidiary of T-Mobile.

I was shocked when in 1997 a wireless entrepreneur told me how cheap minutes were the wave of the future, thanks to new cellular licenses and the increased spectral efficiency of CDMA carriers.

His plan was to buy minutes in bulk from a hungry new entrant — originally NextWave but then later Sprint — and resell them in bulk to companies. Instead of the standard $1/minute fee, corporations would buy bundles of minutes at the dirt cheap price of 20¢/minute if would only subscribe to 1,000 phones.

Founded by Qualcomm alumni, NextWave lurched slowly and painfully towards its 1998 bankruptcy when it couldn’t raise money to launch a network and the FCC sought to bypass bankruptcy law and seize unpaid spectrum.

In 1998, Qualcomm spun off its cellular licenses into Leap Wireless, which by 2001 had 1 million customers for its all-you-can-eat plan under the Cricket Wireless brand. Beginning in 2002, its eventual frenemy Metro PCS copied its business model, raised more money, and made several unsuccessful offers to buy its rival. By gradually building out individual markets, the two carriers have won 11 million flat rate subscribers (about 4% of the US market).

For a while, the Big Six (later Big Four) carriers were able to increase revenues by increasing market penetration, as the number of US cellular subscribers tripled over the past decade. However, growth has slowed recently with penetration up only about 15% in the past three years. Thus, with their networks built out, in Feb. 2008 the Big Four all decided to offer their own flat rate plans at $100/month.

Coercing Premium Data Adoption

The next great hope for ARPU growth was and is data. Whether lousy devices, content or pricing, the adoption was very slow — until the iPhone was released in mid-2007. (I was reminded of this when reviewing the page proofs of my iPhone paper.)

The iPhone and its imitators have been fueling data adoption for the past three years. An estimated 25 million iPhone users added to ATT’s network in 2009 — about half of AT&T’s net new subscribers — have given AT&T both additional revenues and pushed its network to the breaking point.

Still, since the iPhone introduction AT&T, Verizon and others seem to be adding handsets by requiring $30+ monthly data plans with fancy handsets rather than waiting for people to request them. But expecting $100 for voice and data out of every man woman and child is not a mass market strategy — it’s a niche, cream-skimming strategy.

However, to make data a mass-market item will require that operators solve the problem that they don’t have enough spectrum to deliver the “all you can eat” they’ve been selling. Finite bundles of data megabytes are going to last longer than bundles of voice minutes.

Over the next two or three years, the Big Two will use data as premium-priced ARPU booster, while Sprint and T-Mobile will be torn between maintaining margins and undercutting their rivals to gain share. T-Mobile is lagging on network development, while Sprint hopes that its early risky bet on WiMax will give it data capacity before its rivals deploy LTE networks.

I think the idea of linking smartphones to data will go first, perhaps as soon as next year (at least by Sprint or T-Mobile). The Google Nexus One is the first step in this direction, but the flood of Android devices (plus Palm’s death throes with WebOS) will mean that if Apple and Motorola are not interested in commoditizing devices, other firms will. More in my next post.